Munich Personal RePEc Archive

Contagion or decoupling? Evidence from emerging stock markets

Ndiweni, Zinzile Lorna and Bonga-Bonga, Lumengo (2022): Contagion or decoupling? Evidence from emerging stock markets.

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With the global interconnectedness among markets, contagion literature has received immeasurable attention from researchers and academics. This study proposes a test to distinguish between interdependence, contagion and the decoupling hypothesis between advanced markets and emerging markets based on entropy theory to expand this pool of literature. The test is applied to time-varying conditional correlations obtained from an asymmetric dynamic conditional correlation generalised autoregressive conditional heteroscedasticity (A-DCC GARCH) model by comparing the extent of correlations over quiet and turmoil periods across financial crises. In this study, the US and EU are identified as advanced economies, and emerging markets are identified by region to uncover whether they are homogenous or heterogenous as receivers of shocks from advanced economies. Our findings present evidence in support of the decoupling hypothesis in the cases of Brazil and Russia during the GFC and Turkey during the ESDC. Furthermore, substantial evidence supporting the existence of contagion effects between advanced and emerging markets is reported, and the presence of interdependence was constantly rejected. The findings of this paper provide valuable insights for policymakers, investors and asset managers.

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